Government contingency planning for the collapse of Carillion began just 10 days after the company first issued a profit warning and continued for six months up to its demise, it has been revealed.
In a report examining how the government reacted to the troubles at the outsourcing and construction firm, the National Audit Office concluded that the government support to ensure services would keep running after Carillion entered liquidation on 15 January would cost an estimated £148m. This was subject to a range of uncertainties.
The report highlighted that the firm’s first profit warning on 10 July last year came as a surprise to the government, but also to investors, leading to a share price fall. Carillion’s 2016 accounts, published in March 2017, showed the company as profitable and solvent.
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Following the profit warning, contingency planning for the possible failure of the company began on 20 July, and gained momentum from October.
Initially, the Cabinet Office worked to establish a complete list of government contracts, but the NAO found some departments did not respond with details until then Cabinet Office minister Damian Green wrote to them in December.
Ultimately, 65 contingency plans from a total of 26 public bodies were received, fewer than the number sought. At the time of liquidation, Carillion had around 420 contracts with the UK public sector. These varied in length and detail, with the plans provided by NHS hospitals, where Carillion was a service provider, providing day-by-day instructions on what would need to be done in the event of Carillion’s failure.
Also following the July profit warning, the Cabinet Office raised Carillion’s risk rating from amber to red, but the NAO confirmed that a recommendation to move the company to its black ‘high risk strategic supplier’ rating in November last year was not implemented after the Cabinet Office accepted Carillion’s argument that it was already in receipt of the sensitive financial information such a rating would require and that they did not wish to risk precipitating Carillion’s financial collapse.
The report has also revealed that by December, civil servants were speaking to the company nearly every day. Eight Cabinet Office and UK Government Investments officials agreed to be Carillion ‘insiders’, a specific legal status which meant that Carillion gave them access to the same information as its major lenders, including access to cashflow statements. It is a criminal offence to disclose insider information to the market.
Today’s report also confirms that Carillion sought direct government support to keep the business going in January – one call for £210m on 8 January and one for £160m in the two-day period 12-14 January, which MPs on two parliamentary select committees have characterised as a ransom note.
Both requests were turned down by government, and the NAO said that civil service chief executive John Manzoni, along with chancellor Philip Hammond and Cabinet Office minister David Lidington had agreed Carillion should enter “trading insolvency”.
After the company was informed on 14 January that the government would not provide support, the directors applied to the High Court for liquidation the next day.
The Cabinet Office provided £150m to help finance the costs of liquidation, and the NAO has estimated that around £148m will be needed to meet the costs, although this is subject to uncertainties, including the extent to which money can be recouped through asset sales.
The NAO also noted that in the months following Carillion’s first profit warning, the company announced £1.9bn of new government work, including £1.3bn of HS2 contracts. Many of these contracts had been agreed before the profit warning, although in some cases contracts were signed, or variations agreed, afterwards. Auditors said that none of the contracting authorities believed they had grounds for disqualifying Carillion’s contracts under procurement rules, and that with partners in joint ventures liable to take on the work if Carillion failed, such a move could have meant reprocuring some projects. This would have increased costs to the taxpayer and led to delays.
Setting out his conclusions, auditor general Amyas Morse said that when a company becomes a strategic supplier, dependencies are created beyond the scope of specific contracts.
“Doing a thorough job of protecting the public interest means that government needs to understand the financial health and sustainability of its major suppliers, and avoid creating relationships with those which are already weakened,” he said. “Government has further to go in developing in this direction.”
Responding to the report, a Cabinet Office spokesperson said: "Throughout this process, the government has been clear that its priority is to ensure that public services continue to run smoothly and safely. The plans we put in place have ensured this, and we continue to work hard to minimise the impacts of the insolvency, having safeguarded over 11,700 jobs to date.
“We are grateful to the NAO for their report, and will consider their findings."